Image source: BT Group plc
Things are going rapidly downhill for BT (LSE:BT.A) and its share price. In May, the FTSE 100 stock hit 242p, its highest since 2019. Today, it changes hands at 190p, down 23% from those highs.
And the decline is accelerating, with BT’s shares falling 8% in just the past five days. Here, I’m asking the simple question: what’s going on, and is this a top dip-buying opportunity for savvy investors?
What’s happened?
Let me make one thing clear: investor appetite for BT shares hasn’t collapsed. It’s recently been the most-bought UK or US share among AJ Bell clients, as my fellow Magpie John Fieldsend recently commented.
But there’s no doubt that market enthusiasm around BT’s fizzling out. Some of this is related to broader weakness in the telecoms sector, with Vodafone in the UK and overseas operators like Deutsche Telekom and Orange also falling.
The reason? Rumours abound that Airtel Africa‘s Airtel Money division will raise less money than it previously targeted from its upcoming IPO. The proposed valuation is reported to be $8bn-$9bn now, a cut back from $10bn. Naturally, it’s led to valuations across the telecoms industry being re-evaluated by traders and investors.
What’s the risk?
BT operates in very different markets to Airtel Africa and its mobile money division. But that disappointing IPO underlines a major (and growing) threat to debt-laden telecoms companies, namely a surge in global interest rates.
BT’s borrowings are huge and steadily increasing, with its net-debt-to-EBITDA ratio hitting 2.9 times in March, indicating an enormous debt burden relative to earnings. Net debt’s now around £20bn, and the cost of servicing this could soar, with the Bank of England tipped to hike its lending benchmark four to five times over the next year alone.
Extensive cost-cutting and reduced capex for its broadband build-out will help the company tackle these challenges. But the longer the Iran conflict drags on — worsening fears over inflation and future interest rates — the longer the pressure on BT’s share price will likely persist.
Threat baked in?
The question is, does the sharp fall in BT’s shares now reflect this danger? The FTSE company’s forward price-to-earnings (P/E) ratio is now 13.7, below 16 recorded in May.
That’s not low enough to encourage me to invest. You need to remember that today’s P/E remains miles above the long-term average of 8-9. And what’s more, BT’s profits and share price face other significant threats, including:
- Falling revenues as the UK economy struggles.
- Sales and margin pressure due to rising competition.
- Fresh regulatory hurdles (such as price caps at Openreach).
- Enormous pension deficit obligations.
BT has huge long-term earnings potential as the digital economy drives telecoms growth. It also offers a tasty dividend around 4.5%. But, on balance, I think there are much more attractive (and less risky) shares to consider right now, starting with this dividend hero…
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Royston Wild does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
